Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Wednesday, February 08, 2012

The Zuckerberg tax

David Miller has an op-ed in today's New York Times proposing what he calls the "Zuckerberg tax." David notes that Steve Jobs paid no income tax on the $2 billion of Apple stock he accrued in the last 15 years of his life - gain that will never be taxed at the shareholder level, since the stock gets a tax-free step-up in basis at death - and that the same is likely to apply to Larry Ellison of Oracle, who simply borrowed against his vast stock appreciation in order to start living it up, as well as to Mark Zuckerberg for the $23 billion (out of $28 billion total) in Facebook stock that he apparently does not plan to sell.

Then the punchline:

"Our tax system is based on the concept of 'realization.' Individuals are not taxed until they actually sell property and realize their gains. But this system makes less sense for the publicly traded stocks of the superwealthy. A drastic change is necessary to fix this fundamental flaw in our tax system and finally require people like Warren E. Buffett, Mr. Ellison and others to pay at least a little income tax on their unsold shares. The fix is called mark-to-market taxation.

"For individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities (representing the top 0.1 percent of families), the appreciation in their publicly traded stock and securities would be “marked to market” and taxed annually as if they had sold their positions at year’s end, regardless of whether the securities were actually sold. The tax could be imposed at long-term capital gains rates so tax rates would stay as they were.

"We could call this tax the 'Zuckerberg tax.' Under it, Mr. Zuckerberg would owe an additional $3.45 billion when Facebook went public (that’s 15 percent of the value of the roughly $23 billion of stock he owns). He could sell some shares to pay the tax (and would be left with over $20 billion of Facebook stock after tax), or borrow to pay the tax.

"If his Facebook shares decline in value next year, he’d get a refund."

David has previously published an article more fully explaining the proposal's details.

This is probably not my first-best proposal. Working from scratch, I might be more inclined to go for something like a progressive consumption tax, plus an inheritance tax for reasons requiring fuller explanation than I have room for here. An example of the concerns that the "Zuckerberg tax" proposal raises is the fact that non-publicly traded stock, such as Facebook pre-IPO, would not be reached (reflecting the measurement problems that underlie the realization concept).

I also would feel less sympathetic to the proposal if the corporate-level tax were operating more effectively. There would be much less ground for concern about Jobs', Ellison's, and Zuckerberg's personal income tax bills if their profits were being effectively taxed at the entity level. (Indeed, the huge tax that Zuckerberg is going to pay on exercising his stock options worth $5 billion will be wholly offset, leading to a net tax of zero, if Facebook has enough taxable income to use all the offsetting deductions.) But in fact the companies in these types of examples (looking beyond just Apple, Oracle, and Facebook) often pay very little U.S. income tax, because it is easy to play games with the underlying intellectual property so that it yields taxable income in the Caymans or Bermuda rather than here.

As it happens, we are not in a political world where all of the options are on the table. And if you compare Miller's proposal to, say, the talk emanating from the Obama Administration about a "Buffett rule" that apparently would go off adjusted gross income and be a second alternative minimum tax on top of the first one, it looks pretty good. In particular, the aim is much better if our concern lies with people in the top 0.1 percent who appear to be paying very little tax, whether directly or indirectly - and indeed (as the Ellison case shows) who may be paying far less than they would under a well-designed consumption tax.

So here's hoping that this is not just a one-day story in the New York Times op-ed page, and that the proposal indeed gets serious consideration, including from the Obama Administration.

Conceivably they might need to sell stock to repay the loan. But the bank has no reason to call the loan so long as the collateral is more than adequate. When the borrower dies, the estate can sell stock to repay the loan. But at that point its tax basis has been stepped up to fair market value, so the tax on appreciation is permanently avoided.

This mark-to-market idea for the wealthy is an interesting proposal. Like the rest of the tax system, it does not account for inflation. The net effect is that it would be a combined tax on income from capital, as well as capital. That is not such a bad idea, as both are highly correlated anyways. I wonder if it would drive investment away from the markets into more resistant assets.

A consumption tax with inheritance tax also sounds great, but I wonder if this proposal would leave less room for avoidance. As with all approaches, I am sure the devil is in the details.

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About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.